Fossil Fuel Subsidies

And then this article on it.
Nov 17, 2010 - Gerard Wynn - First Enercast Financial

LONDON, Nov 9 (Reuters) - Abolishing fossil fuel subsidies would boost the world's economy, environment and energy security, the International Energy Agency said on Tuesday, referring to a pledge made by G20 countries.

World leaders committed in Pittsburgh in 2009 to phase out, over the medium-term, fossil fuel subsidies which encouraged wasteful consumption. A G20 meeting in Seoul this week may update progress on the goal.

"Eradicating subsidies to fossil fuels would enhance energy security, reduce emissions of greenhouse gases and air pollution, and bring economic benefits," said the IEA, the energy watchdog to 28 industrialised countries, in its annual set-piece World Energy Outlook.

The report estimated such subsidies at $312 billion in 2009, mostly in developing countries, compared with $57 billion in subsidies for renewable energy.

Fossil fuel subsidies were on course to reach $600 billion by 2015, and renewables subsidies more than $100 billion, said Fatih Birol, IEA chief economist and lead author of the report.

Eliminating fossil fuel consumption subsidies by 2020 would cut global energy demand by 5 percent, compared with no action, and reduce carbon emissions by nearly 6 percent by then, said the IEA report.

Economists say that governments should penalise fossil fuels, to take account of the damage that greenhouse gas emissions will cause the climate, and blamed subsidies for encouraging waste and undermining greener alternatives.

Achim Steiner, head of the U.N. Environment Programme, said on Tuesday that a G20 push to phase out subsidies for the fossil fuel industry would be a "good start" to slow climate change.

WASTE

Cash-strapped western countries are struggling to raise cash for renewable energy, which is often more expensive than conventional alternatives. The option of eliminating fossil fuel subsidies may appear more attractive.
Renewable energy needed support, said the IEA, especially given an expected, 10-year glut in gas which would suppress power prices and make renewables even less competitive.

"The gas glut will be with us 10 more years," the IEA's Birol told Reuters. "Cheaper gas prices will put additional pressure on renewable energies especially in the U.S. and Europe. If natural gas is as plenty and cheap as we think, then life for renewables will be even more difficult."

China would lead global uptake of all renewable energy technologies, helping to "bring the cost down compared to today by 20 percent between now and 2035," Birol said.

If recently announced policies to curb carbon emissions were enacted, under a "new policies scenario", renewable energy would reach one third of global power generation by 2035, catching up with coal, compared with 19 percent now, requiring $5.7 trillion of cumulative investment, the report found.

The use of biofuels would increase four-fold, meeting 8 percent of transport fuel up from 3 percent now. Greenpeace said that the IEA was underestimating the uptake of renewables.

The IEA said that pledges made by countries at last year's Copenhagen summit to curb carbon emissions would not meet the goal of limiting average global warming to 2 degrees Celsius, and that the cost of meeting that goal had risen by $1 trillion because of the extra carbon-cutting effort which would be needed after 2020.

Energy Subsidies: Getting the Prices Right

The IEA has undertaken an extensive survey to identify countries that offer subsidies that reduce prices of
fossil fuels below levels that would prevail in an undistorted market, thus leading to higher levels of
consumption than would occur in their absence. The survey identified 37 countries and it is estimated
that these represent over 95% of global subsidized fossil-fuel consumption, with the remaining subsidized
consumption occurring in countries for which reliable energy consumption and price data is not available.

The IEA analysis has revealed that fossil fuel consumption subsidies amounted to $557 bn in 2008. This
represents a big increase from $342 bn in 2007. Fluctuations in world prices, domestic pricing policy
changes, and shifts in demand can all be responsible for year-to-year differences in subsidy estimates.
Since 2008, a number of countries – including China, Russia, India and Indonesia – have made notable
reforms to bring their domestic energy prices in line with world prices. These efforts are expected to
contribute to a reduction in the cost of energy subsidies to these countries in 2009.


The country with the highest subsidies in 2008 was Iran at $101 billion, or around a third of the country’s
annual central budget. Chronic under-pricing of domestic energy in Iran has resulted in enormous
subsidies and a major burden on the economy that is forcing reliance on imports of refined products.
Iran’s leadership came to agreement in 2010 on a sweeping plan for energy subsidy reform; however,
steep economic, political and social hurdles will need to be overcome if Iran is to realize lasting reform.

The IEA analysis highlights that the price signal from subsidy phase-out would provide an incentive to use
energy more efficiently, and trigger switching from fossil fuels to other fuels that emit less GHGs.
Compared with a baseline in which subsidy rates remain unchanged, IEA modelling indicates that phase
out between 2011 and 2020 would:

Cut primary global energy demand by 5.8% by 2020. This is equivalent to the current
energy consumption of Japan, Korea, Australia and New Zealand combined.

Cut global oil demand by 6.5 mb/d in 2020, predominately in transport sector. This is
around one third of current US oil deman
Reduce CO2 emissions by 6.9% by 2020 – or 2.4 GT of CO2. This is equivalent to the
current emissions of France, Germany, Italy, Spain, and the UK combined.

Implementing the Copenhagen Accord and the phasing out subsidies are complementary steps towards
achieving the 450 Scenario, although the savings are not strictly cumulative:

The Copenhagen Accord pledges – if fully implemented – would reduce emissions by
around 70% of what is needed to be on track to meet the 2OC target by 2020

The G20 subsidy commitment – if fully implemented – would reduce emissions by more
than 30% of what is needed to be on track to meet the 2OC target by 2020

Policies to phase-out subsidies for kerosene, LPG and electricity must be carefully designed not to restrict
access to essential energy services as these fuels often support the basic needs of the poor and can be
more easily targeted than subsidies on other energy forms. IEA analysis indicates that today 1.5 billion
people around the world are still denied access to electricity and around 2.5 billion people rely on traditional biomass as their primary source of energy. However, subsidies to kerosene, LPG and electricity
in countries with low levels of modern energy access (ie. electrification rates under 95% or modern fuels
access under 85%), represented just 11% of the $557 bn of consumption subsidies in 2008. Furthermore,
studies have shown that most existing subsidy programs for these fuels could be made more cost-effective
through better targeting.

The World Energy Outlook 2010 – to be published on 9 November – will include a special focus on energy
subsides, building on the findings outlined above. This analysis also forms part of a Joint Report prepared
by the IEA, OECD, World Bank and OPEC that will be considered at the G20 Leaders' Summit in in Ontario
from June 25-27, 2010.

The G-20 has highlighted that increasing the availability and transparency of energy subsidy data is an
essential step in building momentum for global fossil fuel subsidy reform. As a contribution to the process,
the IEA will be establishing an online database to allow the public to access data on fossil-fuel subsidies,
including breakdowns by country, by fuel, and by year. Further details are available http://www.worldenergyoutlook.org/subsidies.asp